Customer benefits in Centralized Purchasing: A Case Study

Continuing from my previous blog, that described challenges and advantages through centralized purchasing, I would like to discuss this concept further with a real world example.Through centralized purchasing, the organization transformed its decentralized purchasing operation into a centralized structure so as to leverage its annual spend with suppliers.

With almost one-half of purchasing in the organization being centralized the company had been able to reduce its materials cost by a significant amount in a year. The company’s goal now was to centralize purchasing in the remaining half and reduce the overall materials cost.
Let us have a look into the process on how they achieved this.
The procurement head formed commodity councils to develop strategies, manage suppliers and leverage spend among divisions for various materials required for their purchase. Before these councils were formed the procurement head did a review of purchasing at the organization level and identified a list of concerns that were to be addressed. In addition to reviewing purchasing processes and practices, the team met with commodity managers at different divisions for two hours every quarter to discuss technology roadmaps for commodities and suppliers. These meetings were instrumental in pulling the procurement function together.
The organization concentrated on its major businesses in the market. It found that there were some cases where consolidation of purchases of some components could be done by two business units. In such cases negotiations could be done to have a structured process in place. Besides establishing commodity councils, the team also formed a general procurement organization and established a procurement engineering function to work towards reducing cost of existing products and to make sure high cost suppliers and products aren't designed into new products. Through this the organization was encouraging value engineering on current products to reduce cost. The team started evaluating its supply base closely and carefully checking suppliers' financial health. Evaluation included checking who was investing in capital expenditures, capacity and research and development. Such an evaluation pointed out the problem, that lack of investment in capital spending by major product suppliers was a concern since some components in the main business line were growing despite tough times.
What it meant to the buyer - Centralizing purchasing was needed if a company is going to leverage its buys and reduce materials costs. Procurement engineers can help reduce costs by suggesting changes in materials, suppliers or processes
In Conclusion -
With centralized purchasing, we need to encourage Value Engineering on current products to reduce cost. For new products the idea should not only be to meet cost targets, but to actually drive supplier selection as far up the Value Chain as possible, so that our next generation of suppliers are strong, competitive and offer best in class services.